Fund manager’s 10-point checklist for a value revival

Best time ever to invest in value shares, says manager of one of interactive investor’s Super 60 funds.

Conditions are perfect for a revival of out-of-favour value stocks, according to River and Mercantile’s head of UK equities, Hugh Sergeant, who argues 10 key tests have been passed for value to make a comeback.

The manager of River & Mercantile UK Recovery , a member of the interactive investor Super 60 fund list, notes that growth and quality stocks have performed strongly during the pandemic, while value stocks have remained unloved by investors. However, he predicts value stocks could surge once the Covid-19-driven economic storm has passed.  

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He says there are 10 key questions investors need to ask themselves to assess whether value will start to outperform once more:

1. Are we at the cyclical low point for the relative value of value stocks?  
2. Are we at the cyclical low point for the relative value of recovery stocks? 
3. Have smaller companies underperformed and are they lowly valued? 
4. Are absolute valuations for value stocks compelling? 
5. Is the global economy cyclically depressed? 
6. Are corporate profits depressed? 
7. Is global economic policy stimulative? 
8. Are value stocks unloved? 
9. Are value practitioners withdrawing their investments?  
10. Is there a catalyst – possible change of economic narrative (reflation)? 

The answer to all these questions is currently yes, which means the stage is set for a value renaissance, he says.

“Value will be back. Value nearly always does well in an economic recovery period, especially if that recovery happens at a time when value is relatively attractively priced, which it most definitely is today,” says Sergeant.

“If you were a person from Mars, and all you had was a deep set of data on factor returns and economic and profit cycles over the last 100 years since proper equity markets began, then if you set yourself 10 key tests on whether now was the time to invest in value, recovery and multi-cap stocks, the answer to all those key tests would be very supportive.”  

Fears of a second wave of coronavirus infections has meant investors are not confident in a recovery, the manager suggests. But he thinks the fundamentals of value stocks will start to shine through over very depressed expectations.

Over the next few quarters, he expects to see global economies recover, deflation turn to reflation and bond yields fall. Cyclical value stocks will see profits recover at this point, argues Sergeant, and passive funds may shift direction to try to benefit from those assets that will do well in an inflationary environment. 

“I believe that now is, at least according to the data, the best time to invest in value, recovery and multi-cap that I have seen in my career,” Sergeant adds.

The River & Mercantile UK Recovery fund is one of interactive investor’s Super 60 funds. It invests in recovery stocks – good businesses that are currently experiencing below-normal profit levels – which are depressing their valuations. Sergeant adds holdings at fire-sale prices in volatile times. 

In common with other value funds it has been a tough year so far for River & Mercantile UK Recovery. Since the start of 2020, the fund has lost 22.3% versus a 16.5% decline for the Investment Association UK All Companies sector. 

Performance has, however, picked up since the start of April, with the fund returning 21% versus 18.7% for the sector. 

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Recent data shows a marked improvement in performance for value funds in general over the past couple of months. 

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.